San Luis Obispo planning for fiscal recovery.

AuthorStatler, Bill

Most, if not all, government agencies experienced some degree of fiscal distress as a result of the Great Recession. Many communities are now experiencing some level of economic recovery but experience indicates that the good times (or least better times) ahead will inevitably be followed by bad ones. The City of San Luis Obispo, California, created a fiscal health contingency plan some years ago that has helped it through a number of financial difficulties, including the recent recession. Although this plan was created before the GFOA's 12-step fiscal recovery process (see the sidebar for more information), the city's plan covers the same steps. This proven process can help any organization respond effectively the next time clouds are on the economic horizon,

HOW IT WORKS

The city started working on a plan for addressing fiscal distress in 2001. The economic picture at that point was very bright, but the city manager hadn't forgotten the financial downturn that had happened ten years earlier, when fiscal stress was compounded by deep cuts in state funding. And sure enough, it wasn't long before the plan was implemented, several times--in response to the dotcom meltdown, corporate scandals, and 9/11, and three times since then, in response to state budget cuts, an adverse binding arbitration decision, and, of course, the Great Recession. It would have been difficult for the city to make its way through these periods without having a fiscal contingency plan in place.

The purpose of the city's fiscal health contingency plan is to establish a framework and general strategy for responding to adverse fiscal circumstances in both the short and long term. For this strategy to succeed, employees and the community must be meaningfully involved in the process; the organization must take a policy-based approach to decision making; and the plan must reflect the city's organizational values. The plan functions as a foundation, presenting the principles and values that specific responses will be based on when they are needed.

The plan is not a specific recipe for expenditure cuts or revenue increases--those need to be determined on a case-by-case basis. Preparing detailed cost reduction or revenue options ahead of time creates several problems; for one thing, people don't tend to put enough effort into developing quality solutions if they aren't taking a situation seriously. The other side of that coin is that planners can take the situation too seriously and create needless anxiety by preparing extreme expenditure reductions that aren't necessary at the time and might never be needed. And absent either of these problems, cost cuts and revenue options tend to have a short shelf-life; needs and priorities change over time.

GFOA 12-Step Program

Step I: Recognize

This closely mirrors Step 1 of the 12-step process. You can't fix a problem if you don't know you have one.

The plan is "triggered" when the city manager determines that the organization faces unfavorable fiscal circumstances, including natural or man-made disasters, cuts in state funding, unexpected large costs, and economic downturns. The plan can also be triggered following two consecutive quarters of adverse fiscal results in the city's top five general fund revenues: sales tax, property tax, transient occupancy tax, utility users tax, and vehicle license fee property tax swap. Adverse results include actual declines in revenues or significant variances from projected revenues. Having a clear definition of when fiscal first aid is needed has been a key factor in the city's ability to take timely action and keep problems from getting even worse.

While the plan focuses on the general fund, the enterprise funds (like water, sewer, and parking) also participate fully because the city is one organization; everyone needs to be on the same page. Enterprise fund participation might be different from general fund participation, however. It is also strategically important to limit enterprise fund rate increases at a time when the city might be considering general fund revenue increases. In fact, rate decreases would be ideal.

GFOA 12-Step Program

Step 2: Mobilization

Organizations "mobilize" by having a strategy in place that spells out clear triggers.

THE KEY ELEMENTS

The city's plan has six main elements:

  1. Maintain reserves at policy levels.

  2. Follow the city's other key budget and fiscal policies.

  3. Closely monitor the city's fiscal condition.

  4. Determine whether the challenge is short or long term.

  5. Develop options.

  6. Implement and monitor results.

  7. Minimum Fund Balance, the First Line of Defense in Adverse Circumstances. Maintaining minimum fund balances at policy levels of 20 percent of operating expenditures allows the city to continue operations and projects while responding to short-term problems. It provides a bridge ("breathing room") to addressing longer-term problems while comprehensive response plans are developed. This is especially important if there are limited opportunities for implementing new revenues.

  8. Other...

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